Employees Are More Mobile Than Ever… Make Sure Your IP Isn’t

As Orange County’s economic climate improves, businesses will hire new employees and competitors will try to lure away employees. In light of an anticipated wave of employee movement, this is an appropriate time to review procedures for protection of IP. We offer a few general guidelines.

First and foremost, know your IP. Businesses and their counsel should assess the actual scope and value of their trade secrets and other IP for many reasons. The Bratz-doll legal saga illustrates one reason. Mattel secured a $100 million victory in the first trial, but suffered a $300 million loss in the second trial. The Court of Appeals ordered a second trial in part because Mattel’s “Assignment of Inventions Agreement” did not unambiguously cover some of the IP that Mattel sought to protect. Every business needs to understand the full scope of its IP in order to protect it. Theft of trade secrets is a serious threat.

Second, update Confidentiality Agreements and IP protection policies. Confidentiality Agreements should match the IP actually owned and clearly define the employer’s expectations. For example, if the employer expects to own employee inventions made outside of working hours, the agreement must unambiguously say so. Again, Mattel’s “Assignment of Inventions Agreement” fell short in this way. Too often employment law advice really does not focus on IP and confidentiality and assignment of inventions agreements.

Third, enhance your computer protections and policies. Courts will not protect a business’s trade secrets if the business fails to reasonably protect itself. Businesses should consider more than password protection for each item of confidential information on company computers – restrict access on a need-to-know basis, frequently change passwords, monitor access, and require employees to use only company-issued personal electronic devices. Written policies should clearly advise employees that the data belongs to the business.

Fourth, make sure the employees understand all Confidentiality Agreements and IP protection policies. Having an employee initial a form Confidentiality Agreement in a stack of new employment documents will do little good. Businesses should formally, early and often explain the requirements to their employees. When an employee leaves, again remind him or her of these obligations, conduct an appropriate exit interview, secure the return of company electronic devices and image the devices for possible further investigation that may become necessary.

Establishing adequate procedures can become crucially important when disaster strikes – a competitor gets its hands on the business’s “secret sauce.” If that happens, businesses need to act fast to ascertain the scope of the problem and take appropriate action. Businesses that have not invested in protecting their IP assets may have few legal options.

Hire a Winning Employee ... Not a Losing Lawsuit

Every business wants an experienced employee, but experienced employees often come with risk of potential litigation from a former employer. This risk can be lessened, never eliminated. Consider the following general policies:

First, know your prospective employee. Many prospective employees may have signed confidentiality or non-compete agreements. Businesses should assess the enforceability of the agreements and whether the applicant’s job can be structured to avoid problems. Also, be careful not to elicit any of the former employer’s confidential information during this process.

Second, make sure your potential employee does not bring or use any protected information of the former employer. Without asking what the confidential information is, a business should ask the applicant in a non-judgmental way whether any information was taken from the former workplace. If any was taken, the applicant should return or destroy the material depending on the circumstances (for example, nothing should be destroyed if litigation is reasonably foreseeable). The applicant should always affirm in writing that he or she understands the business’s prohibition against any use or possession of trade secrets or confidential information of a former employer.

Third, be proactive. Instead of waiting for a cease and desist letter, businesses can send a letter of their own to the former employer advising of the new hire and explaining why any possible restrictive covenants are not enforceable or not being violated. This show of good faith may prevent a lawsuit, and also could put your business in a better light if the matter ends up in court.

Fourth, if litigation appears likely, consider being proactive in court. If the former employer is out-of-state, the California business may be well advised to file for declaratory relief in California before suit is filed in a distant, more costly and possibly less favorable forum.